➤ Increasing demand and government support attract investment in China's medical services industry, such as home care and rehabilitation businesses.

➤ The market size of China's rehabilitation therapy industry reached 58 billion yuan in 2019 and is expected to grow 12.5% annually through 2024.

➤ The pandemic enhances users' and regulators' acceptance of online healthcare services including medical consultation.

China's medical services industry will attract more funding from the private sector as investors see the growing demand for high quality healthcare in the country, said Tim Li, Hong Kong-based managing partner of Inspiration Capital Partners.

The private equity fund, established in 2019, focuses on investments in consumer, healthcare and financial services. While still raising money for its first fund, Inspiration Capital has already started putting money into companies. In November, the fund invested in New Frontier Vitality, a post-acute and geriatric healthcare platform created by Chinese investment firm New Frontier Group.

Tim Li, managing partner, Inspiration Capital Partners Source: Inspiration Capital Partners

Inspiration Capital aims to raise between $150 million to $250 million for the first fund and hopes to close it by the end of 2021. About 30% to 50% of the fund will be invested in healthcare, according to Li.

Li spoke to S&P Global Market Intelligence about the competitive landscape in China's medical services industry and identified healthcare businesses that may see better growth potential amid the pandemic. The following is an edited transcript of the interview.

S&P Global Market Intelligence: Why does Inspiration Capital invest in healthcare services?

Tim Li: We like healthcare services because the rising GDP per capita in China, which has now surpassed $10,000, has boosted the demand for high quality healthcare services such as home care and rehabilitation. However, there isn't enough supply. To date, China only has 0.2 rehabilitation beds for per 1,000 people, still behind the goal of 0.5 rehabilitation nursing beds per 1,000 permanent residents. The market size of China's rehabilitation therapy industry reached 58 billion yuan in 2019 and is expected to grow 12.5% annually through 2024.

Private medical services providers can also help ease the pressure on public hospitals, as patients can go for home care or rehabilitation centers after surgeries. The government has also come up with supporting policies to encourage private sector participation. The long-term care insurance scheme rolled out in pilot cities in recent years, for example, includes at-home care for the elderly in the national health insurance scheme, which allows part of the expenses to be covered by the government.

Home care and rehabilitation, in particular, also require less capital expenditure on land and equipment, which allows companies to maintain a healthy profit margin.

What's the competitive landscape for private healthcare services in China?

First, I don't think public hospitals will actively compete with us in areas like home care and rehab; we are more like partners. The central government has made it clear that they will not rely on public hospitals to serve all [care] needs. Taking rehabilitation as an example, private rehabilitation centers are actually downstream from public hospitals, which send patients discharged from intensive care units for rehab.

Within the private space, I think there will be more players, but most will be small. It's still rare to find companies with capable management teams and the capability to achieve scale. That's why when we see one, we want to invest in one. For sure, this field will be further consolidated too.

Which other areas in healthcare will see better growth potential in China in the coming future?

Healthcare technologies like online medical consultation are very important. These companies have a huge user base but have been struggling to monetize in the past. Part of it is because hospitals in China are not digital-enabled, and they were hesitant to deliver services online.

But with the pandemic, this will change. The pandemic has accelerated digitalization of the whole healthcare industry. Users are getting used to it during the pandemic. Regulators are also more ready to embrace online medical services. Regulators are always cautious, but actually, digitalization can help them solve a lot of regulatory issues as it helps tracking and monitoring. Online medical consultation, for example, can help keep track of what was discussed between the doctor and patient and the prescription to enhance transparency and accountability.

In the future, you will also see insurance companies having more influence on the digitalization process by providing reimbursement based on the digital healthcare records provided by public hospitals.

There will also be more private specialty hospitals and clinics in China driven by the surging demand from the growing middle class. For us, we are looking for specialties that are scalable, like home care, radiotherapy and rehabilitation, which have standard training and operating procedures.

Which region will Inspiration Capital be interested in for cross-border deals? How has geopolitical tension affected your investment process?

We are interested in Australia and New Zealand because historically they have good market recognition for premium healthcare services.

There are also many interesting European medical technology companies such as those developing new braces and eyecare products for teenagers and they are keen to expand to China. We are considering either buying them or setting up joint ventures with them.

Obviously, we will stay away from places that have more political tensions [with China]. But the trade pact between China and the European Union also shows that trade for products and services are not stopped by geopolitical tensions.

As of Jan. 7, US$1 was equivalent to about 6.48 Chinese yuan.